Personal Loans vs. Traditional Bank Loans

When you need to borrow money, there are generally two options open to you. You can go to a commercial lending institution to borrow the money, or you seek what is called a personal loan from someone you know or a payday advance company.

A loan from a commercial lending institution is a big deal in today’s economy. There is a lot of paperwork to fill out, the bank will check your credit, will want some sort of collateral and will want to know, in detail, what you want to borrow the money for. If your credit is less than perfect, or if you don’t have a house to mortgage, or if the bank doesn’t approve of your use for the money, they will not make you the loan. Those are a lot of reasons you might prefer to avoid turning to the bank for a loan.

When compared to that daunting process, personal loans are a very attractive option. There are generally far fewer forms to fill out, your only collateral is usually a post-dated check that the lender holds until the agreed date, and the lender doesn’t generally care what you want to use the money for. The biggest problem with a personal loan is that you may not know anyone with enough extra cash to loan some of it to you. That’s where a payday loan company can help.

A payday loan company simply verifies that you are who you say you are, and that you live where you say you live. They will then immediately advance you money on a post-dated check, for a small fee. They hold the check until the agreed date, and then cash it. If for any reason the check bounces, they simply turn it in as a bad check and it becomes a criminal matter. They know you don’t want that to happen, so they are confident in advancing you the money. And they don’t care why you want to borrow the money, either. If you go to a bank and explain that you need to borrow money in order to buy groceries, or to pay your rent on time, the bank will take that as a pretty good indication that you don’t have enough money to be a good credit risk, as far as they are concerned. You don’t have those worries at a payday lending company.

Of course loans taken through a commercial lending institution often have tax advantages that personal loans do not, but because they are repaid over a short period of time the interest charged isn’t generally large enough to amount to anything significant anyway. This does, however, bring up an important aspect of payday advance loans that is often harshly criticized. The fees charged would be exorbitant – illegal, in fact – if they were viewed as interest. But they are not interest charges, they are processing fees.

Is that fair, or is it just a word game to circumvent usury laws? It depends on who you ask. Bank managers will certainly criticize it as being an argument over semantics. But payday loan companies point out that their loans are very short-term, and that they only stay in business because of these fees. And the fact of the matter is, most of us are willing to pay the fees. The banks won’t loan money to the same clients, and the fees are less than what would be charged on a returned check or a late charge on a bill.